Forecasting UK industrial production over the business cycle

This paper examines the information available through leading indicators for modelling and forecasting the UK quarterly index of production. Both linear and non-linear specifications are examined, with the latter being of the Markov-switching type as used in many recent business cycle applications. The Markov-switching models perform relatively poorly in forecasting the 1990s production recession, but a three-indicator linear specification does well. The leading indicator variables in this latter model include a short-term interest rate, the stock market dividend yield and the optimism balance from the quarterly CBI survey. Copyright © 2001 John Wiley & Sons, Ltd.